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External reserve falls by $535m in May

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.CBN intervention hits $6.84bn
.Scarcity of funds to re-emerge

By Babajide Komolafe

THE nation’s external reserve recorded its second monthly decline of $535 million last month. This came as the Central Bank of Nigeria (CBN) had intervened in the foreign exchange market by selling $6.84 billion from January to last month.

According to the CBN, the external reserve fell from $30.864 billion at the end of April to $30.329 billion on May 31, translating to decline of $535 million during the month.

Vanguard analysis showed that the reserve rose steadily by $7.06 billion from $23.93 billion on October 24 last year to $30.99 billion on May 4 when it commenced its steady decline. The reserve grew by $819 million in November, $1.07 billion in December, $2.33 billion in January and by $1.47 billion in February. The reserve, however, dropped by $645 million in March, while it also grew by $573 million in April.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

The decline in the reserve in May was driven by increased dollar sales by the Central Bank of Nigeria (CBN), and the slight drop in price of crude oil price from $53.69 dollars on April 12 to $48.85 per barrel on June 1st.

Vanguard investigations revealed that the CBN has intervened in the foreign exchange market by selling $6.84 billion to meet various forex needs. Last week, the apex bank sold $460 million in the interbank foreign exchange market, comprising $285.8 million for Retail Secondary Market Intervention Sale (RSMIS), $100 million for Wholesale SMIS, $52 million for SMEs and $45 million for invisibles. In addition to these, the apex bank also sold $40,000 to each of the 3,145 bureaux de change across the country, translating to injection of $125.8 million in the retail segment.

Naira appreciates to N371/$

Meanwhile the naira appreciated to N375 per dollar in the parallel market due to weak demand which resulted to dollar glut. Vanguard survey revealed that the parallel market exchange rate dropped from N382 per dollar the previous week to N371 per dollar at the close of business on Friday, indicating N9 appreciation for the naira.

BDC sources told Vanguard that the demand for dollars was low throughout the week. This, it was gathered prompted glut of dollar in the market with market operators refusing to buy dollars from members of the public.

A BDC chief executive who spoke to Vanguard on condition of anonymity said: “I am not buying dollars this week. We have to wait till next week because people are not coming to buy dollars this week. Nobody knows where the rate will be next week. You might end up having problem selling the dollars you bought this week.”

The naira also appreciated in the Investors & Exporters forex window as the exchange rate for the window fell to N378.56 per dollar from N380.22 per dollar the previous week.

The appreciation recorded by the naira will likely persist this week. According to analysts at Vetiva Capital Management Limited, a Lagos based investment firms, “We expect further CBN interventions in the coming week to continue to sustain liquidity in the foreign exchange market and possibly further prop the naira”.

Scarcity of funds to re-emerge in interbank

Cost of funds will likely rise this week in the interbank money market as the market is expected to experience scarcity of funds. Though the market will experience inflow of N73.6 billion from matured treasury bills, this is, however, inadequate to balance the impact of outflow to fund dollar purchases from the CBN.

Last week, the market enjoyed marginal relief from liquidity pressures, owing to previous week’s inflow from statutory allocation fund of over N400 billion.

Consequently average short term cost of funds fell by 330 basis points. According to Financial Market Dealers Quote (FMDQ), interest rate on Colateralised (Open Buy Back, OBB) lending fell to 8.33 per cent from 11.6 per cent the previous week. Similarly, interest rate on Overnight lending dropped to 9.08 per cent from 12.42 per cent the previous week.

Also reflecting the liquidity relief in the market, treasury bills offered by the CBN during the week enjoyed 85 per cent over subscription. The CBN offered N162.1 billion worth of bills comprising N45 billion worth of secondary market bills and N117.1 billion worth of primary market bills. The offer recorded N299.2 billion subscription while the CBN sold N214.3 billion.

The N45 billion worth of secondary market (Open Market Operations, OMO) bills offered by the CBN attracted N97.5 billion subscription, while the apex bank sold N97.2 billion.  The N117.1 billion worth of primary market bills offered by the CBN attracted N201.7 billion subscription while the apex bank sold N117.1 billion.

Analysts weigh in on PMI in May

The CBN during the week released its Purchasing Managers Index (MPI) report for May. The report showed that the manufacturing sector expanded for the second consecutive month, while the non-manufacturing sector recorded expansion for the first time after 16 months of contraction.

This according to Afrinvest analysts indicate that the nation’s recovery from economic recession is in full swing. They said: “We believe the expansions in the Manufacturing and Non-Manufacturing sectors highlight the fact that the economic recovery is in full swing and we expect a positive feedback on Q2:2017 GDP numbers. Consequently, we forecast Q2:2017 GDP to settle at 0.7 per ent which implies that the economy will be out of recession. Interestingly, the Employment sub-index of the Manufacturing and Non- Manufacturing sectors expanded for the first time in 2017, which suggests renewed optimism of business owners on the future economic conditions. Hence, we expect that sustained improvements in FX liquidity and ease of doing business will continue to drive expansion in business activities in the interim.”

Analysts at Vetiva Capital also said that the May PMI shows that the nation’s economic recovery is continuing at healthy pace. They said: “Unsurprisingly, Nigeria’s economy is showing marginal improvement, no doubt supported by recovering oil parameters and a more liquid FX market. These will likely be aided by increased efforts to improve the ease of doing business in the country spearheaded by the Acting President.

“Recent executive orders to increase government efficiency and legislative directives to expand credit to MSMEs should support economic recovery. However, persistent inflation pressure (May forecast: 15.8 per cent) remain a worry and will continue to pressure business margins and consumer wallets. Nevertheless, reinforced by recent PMI numbers, we expect an economic rebound (2.1 per cent y/y) in Q2’17.”

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